The Expanding Reach of the Individual Alternative Minimum Tax

Leonard E. Burman, William G. Gale, Jeff Rohaly

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This article was originally published in Volume 17, Number 2 (Spring 2003) of the Journal of Economic Perspectives and is re-published with permission.

This report is available in its entirety in the Portable Document Format (PDF).

In January 1969, Treasury Secretary Joseph W. Barr informed Congress that 155 individual taxpayers with incomes exceeding $200,000 had paid no federal income tax in 1966. The news created a political firestorm. In 1969, members of Congress received more constituent letters about the 155 taxpayers than about the Vietnam War. Later that year, Congress created a minimum tax to prevent wealthy individuals from taking advantage of tax laws to eliminate their federal income tax liability.

Both the original minimum tax and its successor, the individual alternative minimum tax (AMT), have applied in the past to a small minority of high-income households.1 But barring a change in law, this "class tax" will soon be a "mass tax." Current projections show the number of AMT taxpayers skyrocketing from one million in 1999 to 36 million in 2010.2 Without reform, virtually all upper middleclass families with two or more children will be paying the AMT by decade's end. The AMT is notoriously complex, and its record on fairness and efficiency is mixed at best. But because of its widening reach, fixing the AMT will be expensive. By the end of the decade, repealing the AMT will cost more than repealing the regular income tax. This paper explains how a tax originally designed to target 155 taxpayers could grow to cover 36 million, discusses economic issues related to the alternative minimum tax and examines options for reform.3

1. A separate alternative minimum tax applies to corporations. See Lyon (1997).

2. Throughout this paper, we compare current or recent data to projections for 2010. We choose 2010 because all of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, the 2001 tax cut) are scheduled to expire, under current law, by the end of 2010. This creates considerable uncertainty about projections after 2010. For example, if EGTRRA were extended, 43 million taxpayers would face the AMT in 2013. If EGTRRA were allowed to expire in 2010, 26 million taxpayers would be on the AMT in 2013.

3. This paper draws from Burman et al. (2002). The reader interested in learning more might also start with Graetz and Sunley (1988), Harvey and Tempalski (1997), Joint Committee on Taxation (1970, 2001a), Joint Economic Committee (2001), Karlinsky (1995), Kiefer et al. (2002), Rebelein and Tempalski (2000), Shaviro (2001) and Tempalski (1996).

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